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Opinion: It's 'Store Wars' in the 21st century

[In this opinion piece, SuperData Research founder Joost van Dreunen examines the new digital store rivalries between Steam, Epic and a host of others - who will reign supreme?]

Tonight on Store Wars: Steam slams against the ropes as newcomer Epic bursts onto the scene leaving a massive cut in rev share. Can the might Valve recover or will it use its ultimate and press release on Half-Life 3 to save the day?

And what about old-timer GameStop? How will it fill the hole left by those pesky publishers and win back favor? Looks like it's going straight to the slaughter house.

(Sorry. I just finished season 2 of Glow.)

Anyway, Valve updated its distribution agreement. Epic opened its store promising a better deal for game makers. Everyone is going nuts.

Breaking with the standard 30% cut which is what most platforms (Apple, Facebook) claim in exchange for their services, Valve announced a few major changes. Two key sentences from the announcement.

First, Valve’s new revenue distribution: “when a game makes over $10 million on Steam, the revenue share for that application will adjust to 75%/25% on earnings beyond $10M. At $50 million, the revenue share will adjust to 80%/20% on earnings beyond $50M.” Succinctly, make more, keep more.

The change is part of an effort to appeal more to big publishers. Activision, Ubisoft, and EA already have their digital storefronts and distribution platforms. Different from the brick-and-mortar space, publishers managed to build their own rather than rely on a third-party. For years, the big guys have had no interest in putting their content side-by-side with a growing number of small and medium-sized game companies.

Second is the data allowances: “we're updating the confidentiality provisions to make it clear that the partner can share sales data about their game as they see fit.”Opening things up (and giving publishers control over their own sales figures) will allow a better risk mitigation and budget allocation for especially smaller companies.

I'm pretty sure that Valve knew about Epic's announcement and released its own news to get ahead of things. However, it feels like there recently have been a bunch of secret meetings about acquisitions between all the big names but because no one got along, they’re now all going to compete instead. It would certainly explain why Epic succeeded in raising another $1.25bn considering its pitch deck likely contained the words 'digital store'.

As a platform Valve has long held dominance but now that the industry is mostly digitally distributed and other firms like Green Man Gaming and Discord are starting to close is, Valve is making concessions to avoid losing its position.

Companies like Facebook, Unity, and Tencent are figuring out how to claim a piece of the market, of course. Cloud gaming is about to go big, which will give Amazon, Microsoft, and Google more market share. It also felt the gravity pull towards Epic when it clocked over a billion dollars and used it to promote its own platform.

Without these changes Valve would become less valuable as a partner and give newcomers more competitive strength. With some providence it determined that facilitating mild competition and enabling network compatibility is better rather than aggressive competition. (For the same reason, Sony, which dominates the console market, relented and agreed to make Fortnite interoperable.)

Not unimportant is the growing consolidation across the top-line of the games industry. In the PC market the top-line firms have been growing at an incredible rate.

Between 2013 and 2017, Activision grew its PC operations at +10% compound annual growth rate. EA’s was +30%, and Bethesda’s +36%. Meanwhile the share of the top 4 public firms based on PC gaming revenue grew from 44% to 60% in that same period. It’s getting lonelier at the top.

Finally, it also suggests that, well, Half-Life 3 is never coming. If it did, it would be a massive draw to the platform and Valve wouldn’t have to concede anything as a vertically integrated superpower. Changing the agreement suggests there’s nothing in the pipe.

So who's going to win here?

Competition is great for consumers. To be fair, though, neither Valve nor the rest has so far really solved the discovery issue, but let's not hold that against them, yet. Game devs, on the other hand, are going to have to spend more time thinking about their go-to market strategy.

Sure, a bigger cut is cool. But what about marketing? And didn't the rapid growth in inventory depress prices for everyone, especially smaller fries? Even collecting all that sales data from all over the place every month is going to be a burden.

With so many platforms sprouting now, we're likely to see consolidation and, possibly, a major acquisition or two to claim economies of scale. More so, store fronts know their success depends on driving traffic and they're willing to take a cut on their own margin just to have your business.

Retail's gonna retail.

[This editorial was originally published as part of Joost van Dreunen's regular newsletter on innovation and interactive entertainment. You can subscribe to the newsletter here.]